Presidents, the Tax Burden, and Economic Growth

by Mike Kimel

Presidents, the Tax Burden, and Economic Growth

This post also appears at the Presimetrics Blog. It contains some information that has appeared in a few different Angry Bear posts, but I think I’m starting to manage to put it into a more coherent narrative. And as I’m able to do that, I’m able to move slowly to the next part of the story.

A couple of weeks ago I had a post on the Presimetrics blog, also on the Angry Bear blog looking at economic growth rates and political parties. The post shows that from 1929 (that’s as far back as GDP goes) to 2009, growth in real GDP per capita was faster when the president was a Democrat than when the President was a Republican. Furthermore, growth was faster for Democratic Presidents who faced a Democrat-majority Congress during their entire term than for those who did not face a Democrat-majority Congress for at least part of their administration. Similarly, Republican Presidents facing Democratic majority in Congress during their time in office tended to better than Republican Presidents facing Republican majorities for most or all of their term. It isn’t a message you’ll hear very often, but it is the only one that is compatible with the data, as you can easily check yourself.

In this post, I want to look at one of the major distinctions between Democrats and Republicans, and that is tax policy. Let’s start by looking at the Federal tax burden (total Federal government current receipts / GDP) by President. The data comes from the Bureau of Economic Analysis’ National Income and Product Accounts (NIPA) tables. Federal government current receipts were pulled from line 1 of NIPA Table 3.2, and GDP comes from NIPA Table 1.1.5, line 1. (Note – this is slightly different than the way we do it in Presimetrics but it is nice to change things up now and make sure that results don’t change.)

The graph below ranks the Presidents by the annualized change in the tax burden. The change is measured from the year before a President took office (the “baseline” level) to his last year in office.


Figure 1.

(As is my practice in these posts I tend not to include the years through after 1938 for FDR because otherwise someone is going to claim that whatever happened while FDR was in office was due entirely to World War 2.)

The graph shows that there is some correlation between the parties and changes in the tax burden. Every single Republican president for whom there is data reduced the tax burden. Conversely, every Democrat except Truman has raised the tax burden. Obama, at least during his first year, is on track to follow Truman and lower the tax burden.

The next graph shows growth rates in real GDP per capita (obtained from line 10 of NIPA Table 7.1)


Figure 2.

The graph shows very clearly that Presidents who hiked the tax burden produced faster economic growth – by far – than the Presidents who cut the tax burden.

And should there be any tea-partiers reading this, yes, in his first year, Obama cut the tax burden. A lot. The so-called stimulus package involved a lot of tax cuts. But as I’ve already noted, to get out of a recession, government spending has historically been much more useful as a stimulus than tax cuts.

Here’s another way to look at things:


Figure 3.

The graph below repeats Figure 3., but it includes a few labels if you want to know which point represents which President.


Figure 4.

In any case, it’s pretty clear that if lower taxes provide any benefits to economic growth, those benefits are extremely well disguised. In fact, it appears that lower taxes are a prescription for slower, not faster economic growth. (Try reconciling the data with Republican, libertarian, or Austrian economic theory.)

Now… I do not believe that higher taxes, in and of themselves, are a cause of faster economic growth. In the book we suggest a few reasons why higher tax burdens might correlate with faster economic growth. But since the book went to press, I’ve had a bit of time to think about ways to test some of these ideas, and I’ve come up with a few new thoughts as well. I hope to try out a few of these ideas in blogs in future posts.

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